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Jumat, 12 Agustus 2011

Indonesia Market Outlook Indonesia: A place to hide? (update2) - BNP Paribas

What are the mitigating factors?
Despite the above-mentioned pressure points, we see mitigating factors that should allay the concerns. These include:
1. Indonesia is a domestic-driven economy, less susceptible to global demand shocks. In his recent report Indonesia – Still a Good Bet, our economist, Chan Kok Peng, pointed out that Indonesia is more insulated compared to the rest of its ASEAN neighbours in case of global demand shocks. Based on the econometric study done by the Asia Competitiveness Institute, an academic research institute in Singapore, which takes into account both intermediate and final demand for exports, it shows that for 1% change in demand from the US, EU, China and Japan, the change in Indonesia economy is smaller than most of its ASEAN counterparts

2. More reasonable oil prices. The current global uncertainties have resulted in oil price retracting its upward surge to USD82.8/barrel. This is positive for the Indonesian government budget, as fuel price for private consumption is still subsidised. The pressure for the government to raise subsidised fuel prices has reduced since the government budget assumes an oil price of USD80/barrel. In the past, large increases in fuel prices have led to higher inflation, putting pressure on the current account which eventually hit the currency. This time the situation is different with the current account stronger and inflation under control, not to mention that the IDR is continuing to strengthen. Even though the government budget (assumes a deficit of 1.7%) would remain sustainable even at an oil price of USD120/bbl, lower oil prices is positive since the funds allocated for fuel subsidy could be put to better use for developing infrastructure for example.

3. Earnings remain solid driven by strong domestic demand and a stronger currency. The 1H11 results for companies under our coverage were strong with overall earnings growth of 27% y-y on the back of top-line growth of 18%. The results showed that earnings were slightly above expectations, with total net profit accounting for 50% of our full-year forecasts. We deem this to be slightly ahead, as some of the large sectors such as banks, consumers and auto are seasonal with 2H usually posting higher earnings than 1H.

We expect earnings growth to remain sustainable looking at the recent experience in the global financial crisis. At the end of 2008, we had cut our overall earnings by around 20%, resulting in flat earnings growth for 2009. We were proven wrong as overall the companies under our coverage delivered earnings growth of 13.2% in 2009 despite commodities posting a 6.6% earnings decline. This is proof that earnings can remain resilient in admittedly the toughest environment since the Asian crisis in 1998.

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